SARANG IKHAR | ISHIKA | JAYRAJ AGRAWAL

The company raised Rs 100 million through a 30-year bond (F.V.=$100) with a coupon of 10%.
At the time of bond issue, the company’s other maturity bonds also traded in the market. Answer
the following questions related to this bond issue. Market price is Rs 120

Q1. Ascertain the cash outflows for the bond till their maturity.

Ans.
Year Cash Outflow
1 – 29 10mn each
30 110mn

Q2 If the Yield of the similar bond is 10%, compute the value of the above
bond? What is your inference?

Time 30 Years
Yield 10%
Coupon Payment 10
Redemption Value 100
Market Price 120
Value of Bond 100
Inference / Status Overvalued

Q3. If after the issue the interest rates dropped by 1% then what would be the price of the
bonds? The bond would trade at _Discount_ to the face value.

Time 30 Years
Yield 10%
Coupon Payment 9
Redemption Value 100
Market Price 120
Value of Bond 90.5731
Inference / Status Overvalued

Q4. If after the issue the interest rates rise by 1% then what would be the price of the
bonds? The bond would trade at _Premium to the face value.

Time 30 Years
Yield 10%
Coupon Payment 11
Redemption Value 100
Market Price 120
Value of Bond 109.42
Inference / Status Overvalued
 SARANG IKHAR | ISHIKA | JAYRAJ AGRAWAL

Q5. What principle of bonds pricing do you infer from the results of Q3 and Q4?

Ans. If coupon payment is greater than Yield / Expected return then bond trades at premium and
if the coupon payment is less than the Yield / Expected return then the bond trades at discount.

Q6. Just after the issue the interest rates dropped by 1%. What is the current yield of the?
bond? What if after the issue the interest rates for the bond rises by
1%? What do you infer?

Coupon 10% Coupon 9% Coupon 11%

Time 30 Years 30 Years 30 Years
Yield 8.1913% 7.339% 9.0454%
Coupon Payment 10 9 11
Redemption Value 100 100 100
Market Price 120 120 120

Inferences – Yield is directly proportional to the coupon payment, If the coupon payment
increases Yield also increases, keeping all other factors constant

Q7. Compute the Present value of bond at different point in time (n=5,10,15,20,25,30)
till the maturity of the bond when interest rate dropped by 1% after the issue?

N Time to maturity PV
0 30 90.57308553
5 25 90.92295998
10 20 91.48643628
15 15 92.39392049
20 10 93.85543289
25 5 96.20921323
30 0 100

Q8. Compute the Present value of bond at different point in time (n=5,10,15,20,25,30)
till the maturity of the bond when interest rate rises by 1% after the issue?

N Time to maturity PV
0 30 109.4269145
5 25 109.07704
10 20 108.5135637
15 15 107.6060795
20 10 106.1445671
25 5 103.7907868
30 0 100
 SARANG IKHAR | ISHIKA | JAYRAJ AGRAWAL

Q9 From the results of Q7 and Q8 we infer that the ________/_________ on the bond
________as the bond approaches maturity.

Ans. When a bond is issued at premium, as the bond approaches maturity the value of the bond
decreases to match the Par Value.
When a bond is issued at discount, as the bond approaches maturity the value of the bond
increases to match the Par Value.

Q10 One of the other PIL bond of 10-year maturity (F.V.=Rs.100, coupon rate=10%) is
also trading in the market at a yield of 9% while the 30-year PIL is trading at a yield of
10%, what is the percentage change in price for each of these bonds for 1% decrease in
the yields across all maturities?

Value of Bond 30 Years @ 9% 110.27

Value of Bond 30 Years @ 8% 122.52 0.111091

Value of Bond 10 Years @9% 106.42

Value of Bond 10 Years @8% 113.42 0.065777

Q11. What is the percentage change in price for each of these bonds for 1% increase in
the yields across all maturities?

Value of Bond 30 Years @ 10%

YTM 100 -0.09314
Value of Bond 30 Years @ 9% 110.27

Value of Bond 10 Years @10% 100 -0.06033

Value of Bond 10 Years @9% 106.42

Q12. What would you infer from the above regards the sensitivity of different maturity?
bonds for a given change in yield.

Ans. The bonds are more sensitive to long-term maturities as compared to short term maturities.

Q13. In the above example for the PIL 30-year bond when interest rate fall by 1% what is
the % change? What is the % change when the interest rates rise by 1%? What is your
inference.

    % Change
Value of Bond 30 Years @ 9% Coupon rate 100 -0.09314
Value of Bond 30 Years @ 10% Coupon rate 110.27  
Value of Bond 30 Years @ 11% Coupon rate 120.55 0.093226

Inference – 1 percent decrease in interest rate has a higher impact on the price as compared to 1
percent increase in the interest rate.
 SARANG IKHAR | ISHIKA | JAYRAJ AGRAWAL

Q14. (Assuming) PIL issued a 40-year bond, 10 years before the issue of this 30 year
bond at a coupon of 11% (F.V.=$100). The yield in the market for 30-year PIL bond is
8%. If the yield for 30-year maturity drops by 1%, then what is the % change in price for
these different 30-year bonds?

    % Change
Value of Bond 30 Years @11%CR, 8%YR 133.77
Value of Bond 30 Years @11%CR, 7%YR 149.64 0.118636

Value of Bond 30 Years @10%CR, 8%YR 122.52

Value of Bond 30 Years @10%CR, 7%YR 137.23 0.1200

Q15. What is % change for yield for 30-year maturity rises by 1%?

    % Change
Value of Bond 30 Years @11%CR, 9%YR 120.55 -0.09883
Value of Bond 30 Years @11%CR, 8%YR 133.77

Value of Bond 30 Years @10%CR, 9%YR 110.27 -0.09998

Value of Bond 30 Years @10%CR, 8%YR 122.52

Q16. What inference can you draw about the price change in bond price for similar
maturity bonds with different coupon rate?
Inference- Bonds with lower coupon rate are more sensitive to increase/decrease in yield rates as
compared to higher coupon rate bonds.